Can Anything Good Come from Revisions?

Jeffrey Roach (00:04):

Hi, I am Jeffrey Roach, chief economist for LPL Financial with some talking points for the current macro landscape. But before we dive in today, as I record this on 9/11, I want to pause in memory of the 2,977 people from 90 different nations who died 24 years ago on this day. First, official data finally caught up. Recent headlines have covered the announcement that the government plans to revise down their estimates of payroll growth over the past year. No surprise there. The chart here shows that we now have three months of negative payrolls in the past 18 months. Now, the benchmark revisions are not uncommon, however, the magnitude this round is noteworthy. Historically, benchmark revisions are plus or minus 0.2%. The estimated benchmark revisions for March 24 to March 25 is 0.6%, and that's to the downside. The preliminary estimates indicate a downward revision to non-farm payrolls via a combined 911,000 over that 12 month period.

Jeffrey Roach (01:12):

So why the revisions? The preliminary benchmark revision reflects the difference between two independently derived employment counts, and it's based on the quarterly census of employment and wages. It's a more comprehensive survey than the smaller monthly payroll survey. In last year's preliminary benchmark revisions were also larger than the historical average, meaning the labor market was weaker than we thought two years ago and that trend continues for this most recent benchmark revision too. But if you are tracking the alternative measures, the main takeaway is the official data just finally caught up. And what does this mean? It's important to compliment your analysis with private sector data. A decelerating labor market will allow the Fed to highlight the need to ease rates. We should expect the Fed to officially start the rate cutting campaign if inflation expectations remain well anchored. It's also important to note that solid household wealth is keeping the middle and upper income consumer afloat, but has the economy in an atypical business cycle.

Jeffrey Roach (02:18):

Second, productivity is better than we thought. It's time to tell the rest of the story here. Headlines have focused on the preliminary benchmarking for the payroll numbers that will be finalized early next year. We too think revisions help identify the trajectory of the economy. But one overlooked point is this, the economy grew last year with fewer people working. That means labor productivity measures are stronger than we think. This is extremely important because productivity growth needs to offset the shrinking labor force to get a growing economy. Third, cars and clothes got more expensive. We just got the latest inflation data and it ran a bit hotter than expected because of current trade policy. Tariffs remain chiefly responsible for the upshift in those core CPI numbers. Core goods prices rose by 0.28%. That's the biggest increase since May 2023, driven by a 1% jump in used vehicle prices.

Jeffrey Roach (03:19):

Prices for apparel, which were unresponsive to the tariffs until now rose by half a percent. While prices for video and audio products also advanced by 0.5%. Conversely, prices for cell phones and prescription drugs, both exempt from tariffs, continued to drift downward. We now judge that about one-third of the likely final boost to core goods prices from the tariffs has filtered through, which means we may not get a reprieve until the end of the year. Given the way rates have fallen, most investors have looked past this temporary tariff impact. So to close it all out, rate cuts are still in play and we know historically risk assets do well when the Fed is easing in non-recessionary periods. Well, that's all for now. If you want more insights on global market trends, follow us on social media and take care.